We’ve been talking about the single most important day of the year: election day. And now, less than five weeks away, we’re in a pivotal time for the markets…
Seasonal bullishness is setting in for October and November (remember, November is the start of the Best Six Months seasonal pattern) …
The Fed announced a half-point interest rate cut, with the anticipation of more to come before the end of the year…
And, most importantly, we’ve got the presidential election cycle – which is exactly what I want to talk about over the next few weeks.
But before we go any further, it’s worth our time to revisit the very foundation of patterns and pattern-trading. This will help you in three ways as we get closer and closer to November 5th:
-
Block out the noise in the financial news media…
-
Gain better insight into the price action you’re seeing before, during, and after the election… AND
-
Create your own profit opportunities
Let’s jump in…
What I Mean When I Say “Pattern Trading”
When most folks hear that I’m a pattern trader, they usually think of chart patterns – the ones with goofy names that remind you of real-world objects.
Like the “cup and handle,” which usually signals a continuation of a bullish uptrend…
Or the “head and shoulders.” Three sharp peaks, with the middle peak usually higher than the preceding and subsequent peaks. This pattern can signal a bearish downtrend…
Or the “flag.” Shaped like a sloping rectangle, a flag can signal a reversal of the current trend when and if the stock breaks out in the opposite direction of the trendlines…
Now, I don’t mean to sound so dismissive. These kinds of patterns aren’t useless. They can even help you predict how a given stock may behave at a given point in time.
Emphasis on the word “help.”
Like any indicator, you can’t just trade these patterns whenever you see them. They function best as an additional tool to confirm a potentially profitable setup.
But here’s the thing…
I’m a pattern trader because I believe it gives me an edge in the markets.
These kinds of chart patterns are observed by millions of traders around the world every single day. You don’t even need Bloomberg terminal access or expensive charting software to see them.
Anyone can go to Yahoo!Finance, pull up a stock chart, spot an “ascending triangle” or a “rounding bottom,” and make their move.
That’s not what I’d call an edge.
So, I want to be clear: when I talk about being a pattern trader, I’m talking about trading patterns that no one else can see.
Patterns are in all walks of life. Where and how people sleep, drive, eat, save, and of course spend – and invest – there’s a pattern behind it.
And when it comes to trading, I’m not talking about overall seasonal patterns that everyone knows about, like Sell in May and Go Away… I’m talking about patterns that occur in the best 370 stocks in the market… every day the markets are open.
We don’t know WHY these patterns occur. We just know that they do – repeating year after year at a 90% clip – and that they can be incredibly profitable. But to understand the right way to trade them, you need to know which ones to trade…
The Five Primary Trading Styles
There are five primary styles of analysis I use to determine the right security to trade:
-
Seasonal
-
Trend
-
Contrarian
-
Volatility
-
Statistical
The first style is the one I want to dive into today. Although my method for spotting and scanning this type can be complex, the pattern itself is simple to understand. And it starts with understanding seasonal analysis.
To me, seasonal analysis is the process of researching a security’s price patterns to spot a consistent, repeatable, and predictable behavior over a period of time. Now, when I say ‘seasonal,’ I’m not referring to back-to-school or tax time… I’m not talking about the holidays or actual seasons, like fall or spring either, although there are profitable patterns out there (we’ll explore those in the future).
What I’m basically looking for is the best day to buy and sell certain stocks.
To do that, there are three questions that I set out to answer and have used for many years in my trading:
-
Are there specific stocks or exchange-traded funds (ETFs) that have repeatable price patterns?
-
Is there a security that trades in certain manner every year – regardless of the time of year?
-
Does the security trade higher or lower over specific date ranges or numbered trading days?
To get the best results, I look at the past ten years’ worth of data on those securities to see the type of success rates (as a percentage) they’ve had. I also look at the average price move for each security in which I’ve spotted a repeatable pattern.
What I’ve discovered over my many years of research is this: There are securities that trade in a consistent price pattern, higher or lower, at various times of the year and multiple times over the year. And, before scans really existed, I took these patterns and charted them on a simple calendar you’ve seen many times now – the Money Calendar:
The Money Calendar is my proprietary software that I use to find seasonal patterns – these repeatable price moves over specific periods of time. It scans millions of data points to find the stocks and ETFs that have moved higher or lower from the start date (the open price of one date) to the end date (the closing price of a later date). In the early days, I would manually add stocks to the calendar that I found with the best buy and sell dates. But I’ve now got built-in artificial intelligence that constantly scans, adds, and adjusts the best days to buy and sell.
As I’ve previously shown you, the green squares tell you that that majority of patterns on the securities listed for the month are bullish. Red squares indicate bearish patterns on these securities. The darker the green, the closer to a 100% bullish pattern for that day. The darker the red, the closer to a 100% bearish pattern for that day.
All I need to do to see the list of qualifying stocks with bullish or bearish patterns is click on a day. Then, I can see every stock The Money Calendar identified, along with the start and end dates:
Now, there are sectors that have been proven historically to trade higher, regardless of the outcome of the presidential election. We’ll talk about these sectors (and stocks) over the next few weeks, so I’m not going to let the cat out of the bag just yet.
In fact, tomorrow, I’m to take you on a deep dive into the overall markets heading into the election as well as the sectors and stocks that stand to benefit the most based on the outcome.
And I’m going to share some brand-new research from the Money Calendar that tells you which stocks have always gone up after election day – regardless of the winner.
So, keep an eye on your inbox tomorrow afternoon, October 3rd, around 3 p.m. ET.
Until then…
Tom Gentile
America’s Pattern Trader